Biora Therapeutics Inc (BIOR) 2020 Q3 法說會逐字稿

Welcome to the Progenity third quarter 2020 earnings call. (Operator Instructions) I will now turn the call over to Robert Uhl, Managing Director with Westwicke ICR, Progenity's investor relations firm.

Thank you, operator. Good afternoon, and welcome to Progenity's third quarter 2020 financial results conference call. Joining me on the call are Dr. Harry Stylli, Chairman and Chief Executive Officer, and Eric d'Esparbes, Chief Financial Officer.

Before I turn the call over to Dr. Stylli, I would like to remind you that today's call will include forward-looking statements within the meaning of the federal securities laws, including but not limited to the types of statements identified as forward-looking in our quarterly report on Form 10-Q that was filed on August 14, 2020, our quarterly report on Form 10-Q that we are filing today and our subsequent periodic reports filed with the SEC, which will all be available on our website in the Investors section.

These forward-looking statements represent our views only as of the date of this call and involve substantial risks and uncertainties, including many that are beyond our control. Please note that the actual results could differ materially from those projected in any forward-looking statement. For a further description of the risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements, as well as risks related to our business, please see our periodic reports filed with the SEC.

A slide deck with some supplemental third-quarter financial information is also now available on the website, but it will not be referenced by the speakers on the call today. With that, I will now turn the call over to Dr. Harry Stylli, Chairman and CEO of Progenity.

Thank you, Robert, and thank you all for joining us this afternoon. A quick note with respect to our ongoing litigation matters. While we continue to believe them to be unfounded and expect to vigorously defend our position, we're not going to go into detail on this call, but you could find the latest updates in our third-quarter 10-Q. We made significant progress during the third quarter, both with our revenue-generating business and especially with our pipeline innovation programs.

Progenity has not issued guidance in 2020, but we do recognize we have analyst estimates and consensus forecasts, which we believe need to be recalibrated, and Eric will cover this later in the call. Our leading indicator of demand, and to a large degree revenue, is our reported volume, which grew 12% quarter over quarter despite the pandemic-induced lockdowns in certain of our key markets. This growth was driven primarily by our COVID-19 testing. Revenue for us is a lagging indicator, especially for companies still very much progressing through the transition phase of our in-network contracting process and revenue cycle management optimization.

In the quarter, we also witnessed some customer turnover due to necessary changes we implemented in revenue cycle management earlier this year, and this specific effect is close to running its course. We have also increased our focus on securing new business with significant success, the contribution of which will be evident in the coming months. As a result, our third-quarter financial performance still carries some of the effects from prior quarters, which includes the pandemic-induced lockdowns that occurred in Q1 and Q2, where we still showed relative resilience in demand of NIPT and carrier testing, but also a slower overall reimbursement progression in general, which delays the recognition of our revenue.

I am pleased to share that during the third quarter, Progenity further increased its in-network covered lives with an additional 1.5 million lives from new contracts with regional players and also added the MultiPlan national contracts, giving potential access of up to 60 million plan members. In addition to that achievement, we expect that our NIPT revenue and ASP will gradually improve as more payers transition to covering NIPT for average risk pregnancies. Several state Medicaid plans and commercial payers, including more recently Humana, are offering coverage for average risk.

As a result, a majority of our payers currently now cover average risk, and of those, most have indicated that it's a permanent shift. In September, we expanded our carrier screening testing menu to better conform to payer medical policy coverage, which we believe will also result in improved revenue and ASP in the coming quarters, and we have already converted more than 50% of our carrier screening book of business.

We also implemented a patient cost estimator in September, which will simplify determining the patient's responsibility early in the process and we believe will help drive revenue and expand business. We expect to begin realizing modest benefits from these changes in Q4 with significant volume and revenue contribution from our NIPT and carrier testing product lines in 2021.

We always work to use our capital efficiently and expect to further focus our efforts on key value drivers and catalysts. Furthermore, we have taken advantage of existing excess capacity at our Avero affiliate, which until recently, were still limited to offer COVID-19 testing in local markets.

By January, we expect to be national with greatly increased capacity for COVID-19 testing to serve our OB/GYN MFM patients, among others. COVID-19 testing expected to impact both margins and volumes positively. And we expect that further growth will be driven by our ability to maintain a competitive 24-hour turnaround time for more than 98% of our accession tests.

We are working diligently to demonstrate that our revenue-generating business is a strong and positive contributor to our success and expect this to be more evident beginning in 2021. As a point of reference, our Avero affiliate, which is already in-network with all major commercial players, are not subject to Progenity's transition effects in 2020, experienced strong growth with its core offerings that include NIPT and carrier testing. We firmly believe such growth will also resume with Progenity. In the meanwhile, we will be controlling our expenses and thoughtfully allocating capital, especially to ensure the success of our near-term growth catalysts that include our core business.

Progenity is innovation-driven, and in this regard, we have achieved development and critical risk-reducing milestones across our pipeline programs. For example, Innatal 4 continues to progress through development. The past month we made a critical advancement by finalizing our protocol design and testing. We have achieved high target specificity across over tens of thousands of multi-plex single-molecule detection probes, resulting in measurable aneuploidy [dosage] response and minimal background noise.

This achievement is expected to enable assay integration and initial performance benchmarking in Q4. Last quarter, we also disclosed our ability to identify fetal DNA, and we continue our development efforts to quantify fetal fraction. Experiments are now underway, and we plan to achieve our next key milestone of demonstrating fetal fraction quantification in over 100 subjects and transfer the single molecule assay to optimization next month.

Fetal quantification by single molecule platform is critical, especially given that ACOG recently indicated the quantification of fetal fraction is essential for NIP tests. We believe that Innatal 4 has the potential to reduce our NIPT direct COGS by up to 50%, allow much faster turnaround time than sequencing and achieve equivalent performance to sequencing. Innatal 4 can work with or supersede sequencing for NIPT. In addition to NIPT genomics, our single molecule platform has the potential to detect RNA, epigenomics and proteins with exquisite sensitivity and low cost provided the biomarkers are known.

Switching to our development efforts in the field of preeclampsia, a key milestone in analytical verification for our LDT rule-out test, now branded Preecludia, was successfully achieved. We are pleased with how our assay and platform are progressing. Preecludia is now out of R&D and in our operations group, which will be responsible for both validation and commercialization of the test next year.

As a reminder, we already have the patient samples for validation, which we expect to complete by mid-2021, followed by commercialization in the second half of 2021 and start accessing a $3 billion US market. We also had a productive pre-submission meeting with the FDA for our IVD version of the test, and I'm pleased with the guidance received to date. We have scheduled a preeclampsia R&D Day on November 20 that will include perspectives and insights from physicians and patient advocacy groups to provide more information, including discussion of the analytical and clinical verification data.

Moving to our GI precision medicine programs, the performance of our fluorescent assay metrics developed for the PIL Dx SIBO program was recently presented at the American College of Gastroenterologists and by leading key opinion leader, Dr. Satish Rao. His oral presentation was honored with the highest award by the college for the small valve section.

And this reflects the quality of the study and receptivity of the college to our solution. This is perhaps the most important risk-reducing step for this program as it was not clear how our assay would perform against the gold standard. In Dr. Rao's oral presentation, he discussed results from a study at three clinical sites and 66 subjects, where a benchtop version of the Progenity SIBO assay had 94% agreement with the gold standard of endoscopy -- endoscopic aspiration and total bacterial count by culture and plate reading.

The gold standard method is demanding for both the physician, microbiologists and the patient and requires sedation with the results taking a week. We expect to be able to quantify live bacteria within our ingestible lab within hours of ingestion and without the need to recover the capsule. The prevalence of SIBO-related disorders in the US population, according to Dr. Rao, is at least 10%, which corresponds to over 100 million annual patient visits with signs and symptoms resembling those as SIBO.

We believe that PIL Dx SIBO device will emerge as the first FDA-cleared diagnostic solution for patients with suspected SIBO, a vast US market with no clinical useful alternatives. As a reminder, the PIL Dx can perform a range of fluorescent assays for a variety of GA-related pathologies and our RSS program is closely related to the PIL Dx and is also progressing well.

In our targeted therapeutics program, last Friday, we announced a key milestone for the drug delivery system, DDS, which is initially being developed to treat ulcerative colitis. The DDS completed a preclinical device function study using a fully functional autonomous device. Ulcerative colitis is poorly managed with current therapeutics in part due to the inability to get sufficient drug concentrations at the site of disease without side effects.

William Sandborn, Dr. William Sandborn, Chairman of our Clinical Advisory Board and Chief of the Division of Gastroenterology and Director of the Inflammatory Bowel Disease Center at the University of California San Diego stated that our DDS platform and ongoing preclinical studies have the potential to lead to significant improvements in patient outcomes by producing high drug concentrations locally at the site of disease through improved efficacy while limiting systemic exposure to ensure safety.

The study endpoints were device function as determined by evaluation of the data from the recovered capsules and evaluation of the localization technology in canines as assessed by the PK profile of acetaminophen and 5- amino salicylate formulated in solution. We are pleased to report that all devices used in the study functioned as intended and the PK profile showed drug release in the large intestine, the intended target. This provides evidence that our DDS device platform performed as intended.

The auto-localization technology developed for use in humans worked as well in a canine model, allowing us to use this model for IND-enabling nonclinical safety studies. We expect to use the DDS in a full function study in normal human volunteers scheduled for March 2021 and then begin preparation for an IND.

In animal models, mice and swine, of colitis we showed that by delivering topically drugs formulated a solution using a cannula resembling the function of the DDS. With this disease models and delivery proxy, we are able to penetrate the mucosa and achieve compelling PK/PD effects with both monoclonals and small molecules with little systemic breakthrough occurring.

The submucosal program for the systemic distribution of biomolecules by the oral route has also advanced, and we expect to update our next key milestones shortly, showing for the first time the performance of our fully autonomous device in a canine model.

We continue to be actively engaged with additional potential pharma partners as we advance our precision medicine pipeline and expect developments on that front in the coming quarters. With that, I'll now turn the call over to Eric d'Esparbes, our CFO, for a discussion of our financial results for the third quarter of 2020.

Thank you, Harry, and good afternoon, everyone. I'll provide a brief overview of our financial results and also invite you to review our third-quarter financial release and our 10-Q for a more detailed description. During today's call and in line with our second-quarter call, I'll describe our sequential quarterly performance focusing on our second and third quarters of 2020. We also include year-over-year performance in our disclosures, but we believe this sequential comparison is more meaningful as Progenity transitions to a largely in-network operation and reflects the impact of the COVID pandemic, which was not a factor in 2019.

We reported $25.9 million in revenues in the third quarter of 2020 compared to $17.3 million in the second quarter. Harry already mentioned earlier in the call, some of the transition we're still experiencing in our revenue cycle management process and in-network migration requiring us to maintain our current revenue recognition approach until such time as our trailing six to nine months test liquidation performance improves sufficiently to allow us to report higher realized ASPs.

We are still of the view that this phenomenon is transitional, and we remain optimistic in our financial outlook, especially in 2021, where we believe the vast majority of the operational improvements we've implemented this year, combined with the benefits of our increasing in-network position and an increasingly favorable average risk NIPT coverage by government and commercial payers will all combine to deliver a strong financial performance.

With regards to guidance, we want to proactively manage investor expectations and give a view on our anticipated performance in the fourth quarter of 2020. The fourth quarter tends to be slower for us in terms of volume growth due to holidays in November and December, which affect demand dynamics and timing, but we are very encouraged by recent weeks of volume growth trends.

Also the relative demand between our women's health products and our COVID-19 testing, which carries lower ASP, but higher margins drives reported revenues. All these factors considered, we expect to achieve in the fourth quarter revenues and volumes similar to what we reported in the third quarter. We believe the transition of our core molecular testing business will continue to progress into 2021 when we expect to see the benefits of growing volume demand and the revenue cycle management improvements we've implemented so far this year.

Our ASP improved in the third quarter of 2020 compared to the second quarter since we had no revenue accrual adjustments in the third quarter. Without such accrual, ASP would be slightly down due to a higher contribution from COVID test volume. Our third quarter COGS per test decreased slightly compared to the second quarter due to higher volume during the third quarter and performance improvements through efficient cost control and product mix shifts between the periods.

SG&A expenses increased between the third and second quarters of 2020, largely the result of additional stock-based compensation accruals as well as slight increases in professional and legal consulting fees. Sales and marketing expenses increased 3% in the third quarter compared to the second quarter, a slower pace than our volume growth in the period, while our R&D expenses increased slightly as we continued to make substantial progress in our innovation pipeline and achieving important derisking steps justifying increased investments.

I want to note that we continue to monitor our G&A and sales and marketing spend very closely to make sure it remains in line with our top-line progression and make only incremental investments in our R&D programs as we gradually achieve key derisking events and achieve important development milestones. We are proactively reviewing our operating expenses for the next few quarters with a goal to maintain that alignment.

The third quarter 2020 net loss of $47 million was $6.5 million favorable compared to second quarter net loss largely resulting from increased reported revenues during the third quarter. Third quarter 2020 operating cash flows were negative $51.3 million compared to negative $13.5 million in the second quarter.

The main difference between the two quarters was the receipt of $22.7 million of CARES Act income tax recovery in the second quarter compared to a receipt of $15 million in the third quarter and with the payments in the third quarter of $16.2 million in accelerated government and payer settlement obligations.

We had a cash balance of $60 million at the end of the third quarter. While our balance sheet provided us with a cash runway to achieve in the third and fourth quarters of 2020 important, value-creating milestones form our R&D pipeline, as Harry described earlier, we continued to work on optimizing our capital structure, including both debt and equity options. With that, I will now turn the call back to over to Harry.

Thank you, Eric. As we look at the rest of 2020 into 2021 and beyond, we have many drivers of value creation and revenue generation at Progenity. We believe we will continue to experience resilience and return to sequential quarterly growth driven by the differentiation of our products and services and by recognizing the benefits of increased in-network coverage from both our core business as well as our COVID contribution.

But we are particularly excited with the progress and transformational potential of our R&D pipeline with two major product launches anticipated in 2021, Preecludia and Innatal 4 both in our channel. In 2021, we expect to meet development and launch milestones for Preecludia and Innatal 4. The scheduled preeclampsia R&D Day on November 20 should help better inform investors with regard to preeclampsia and the large unmet clinical need our tests can satisfy.

We believe that our precision medicine platform will continue to gain momentum, and we anticipate further value add partnerships that will provide validation as well as non-dilutive capital. Progenity is well positioned for compelling value creation in the coming months and years, and we'll continue to identify effective ways of achieving our goals with an efficient use of our capital. With that, operator, we are now ready for questions.

(Operator Instructions) Steven Mah, Piper Sandler.

Thank you, operator. Good afternoon, guys. Thanks for taking the questions. So maybe first one for Eric. So I appreciate the color you gave us on the lower revenues per test in the quarter. It sounds like it was an accounting issue with the historic rate, they were being applied to current volumes. Just one question, was this something that you were aware of that would happen or was this unexpected or did you think the revenues were going to be offset because of additional reimbursement? I just want to get a little bit more color.

Sure. Sure. It's purely a factor of the pace that it takes to actually see increased liquidation as you transition a network. And under ASC 606 rules, you have to see until you have enough trailing history of liquidation improvement before recognizing revenues on new volume you generate at a higher rate. It's purely a conservative approach under GAAP. So pretty straightforward.

And then you think this is going to resolve in six to nine months?

Yes, it just takes time to continue improving the liquidation. And as we progress there, it should transpire into.

Okay, got it. And then moving on to average risk real quick, so obviously a big catalyst for the space. You mentioned the majority of your payers are now covering average risk. Do you have a -- give us a rough sense of the number of covered lives in average risk? And then give us a sense how important it is getting in-network with average risk quickly. And then where you're at now in terms of covered lives, are you happy with that number now? Or do you think you could have done better?

So with regards to covered lives, we've updated the deck a little bit to show we're at 144 million covered lives, not including the MultiPlan plan. And the reason for this is that the MultiPlan national plan has a little bit of overlap for certain in-network agreement as well. So right now, we're close to 70% of our revenues that are really in-network. So that gives you an appreciation of where we are currently. So we still have a few large contracts in progress. So Anthem and United are really the two big ones that remain in our plans.

Okay, got it. And all of those 144 million covered lives, excluding MultiPlan, they're currently reimbursing average risk?

The majority of them, I would say we're at about 55% or so when we run the numbers that currently cover average risk NIPT, and it's increasing. We're seeing a fairly good momentum, and last quarter both government and commercial plans adding average risk reimbursement. So the trend is definitely visible.

About 55%. Okay, great. And then is that 55%, is that ahead of schedule or are you happy with that number or could you have done better or?

Yes. So I think the last quarter or at least in one of the conferences, we answered a question that we'd probably see a couple of years of progression before, you know, most of the market actually covers average risk. It's probably going a little bit better than we originally thought. We view this as a very positive sign. And the other thing is that the ACOG guideline was pretty clear, where physicians are highly incentivized of prescribing NIPT test for all pregnancies. So that's why there's momentum gathering there.

Yes, it seems like that's a pretty reasonable number. And then real quick, you mentioned the sales and marketing expenses. Can you give us an update on the build-out of the sales and marketing team? I know you said, you recently added 15 sales reps and you're going to continue to hire [ways] to become closer to the size of peers. Given your comments on the, you know, watching the cash spend and keeping it in line with top-line revenue growth, could you give me an update on the sales team and the build-out?

Yes. So this is Harry. I'd say, yes, we did add additional headcount to the team, and I think as I said on a previous call, we will do it in kind of ways. We want to see the impact on -- positive impact on top line of that investment and won't make any additional hires until that's really transparent.

Thank you. I'll get back in the queue.

Catherine Schulte, Baird.

Hey guys, thanks for the questions. I guess first, you mentioned COVID testing was the main driver of the sequential volume increase. And what did COVID testing contribute to volumes and revenue in the quarter? And then what are your expectations for the core non-COVID business from a volume perspective in the fourth quarter?

So we still don't really break down the relative contribution from the specific test in our volume. But COVID is gradually taking a larger contribution. It will probably start being relatively material in Q4. So that's the way I would position this at this stage. The core business, I think Harry mentioned that we are gaining business and accounts and over the last few weeks, we've seen good growth momentum for the core business. So we remain cautiously optimistic for the Q4 performance.

Okay. And you touched on average-risk from a payer perspective. One of your peers talked about seeing an uptick in average risk NIPT orders following the ACOG guidance. Is this something that you observed as well? And how much of a driver do you think that could be going forward?

We're seeing evidence of that, and we do expect broader demand for NIPT because of the ACOG bulletin.

And maybe last one for me. Any comments on how the pharma collaboration you entered into last quarter is going? And did it contribute any revenue in the quarter?

It contributed some revenue into the quarter and it's going very well. It's advancing and progressing as expected.

(Operator Instructions) Andrew Cooper, Raymond James.

Maybe just one on gross margins first for me. As you think about the commentary you gave around mix for ASP, if we back out the accrual, it seems like you had a lot bigger impact on ASPs for -- on ASPs for the COVID mix than we did on margins. So just how do we think about what that dynamic is really like? Or help me kind of square the circle there when we think about the COGS per test not necessarily dropping as much as we saw the ASPs?

Yes. So Andrew, thanks for the question. The main reason is really proportionate contribution to the revenue versus the COGS and you will probably see still some evolution moving into the fourth quarter. Our approach to just the book of business that we have is the core business COGS is pretty -- is proportionately much higher than the COVID testing COGS. So it will take a little while before proportionately the margin coming from COVID supersedes, if you want, the margin contribution from the core business just because of relative size. So hopefully that helps.

And then maybe just kind of on average risk asking, I think, something a little bit different than the others have. But I think in past conversations at times you sort of referenced that that would give you maybe little bit more -- maybe drive a little bit of a shift in sort of how you think about marketing relative to being a little bit more targeted sometimes on the volumes you were after. So just maybe an update on how you think about going after what is now a materially bigger potential revenue opportunity with a greater coverage. How should we think about how that changes your sort of sales and marketing efforts?

So we're definitely targeting more aggressively NIPT business. I think we've said that historically, we took a conservative approach because of poor reimbursement. Obviously, our strategy has changed during the course of this year. And we actually see the results; you see the prescription behavior by physicians is moving towards broadening prescription for NIPT to all pregnancies. So it definitely affects how aggressive we are to go after NIPT business compared to before.

Okay. And then I'll save my questions on preeclampsia for a couple of weeks from now. So I will jump back in the queue. I appreciate it.

Perfect. Thank you. We really appreciate your questions.

(Operator Instructions) Dan Leonard, Wells Fargo.

Thank you. So Harry, at the start of your prepared remarks, you mentioned some customer turnover. Could you elaborate what proportion of your customers did you have to essentially let go due to revenue cycle considerations?

I'll give you rough number, 10% to 15%.

And that will lap that impact in -- when -- in Q1 of next year or Q2 or when do you expect to lap the impact?

We're already at the tail end of it. So I think this quarter, there is a small chance it could spill over into next quarter as well. But I think most of it will be done this quarter and probably the first months of next quarter. But we really, really are at the tip of the tail. Most of it has worked through the process.

And then on the managed care side, do you still think it's a possibility to get in that work with Anthem by year end? Or do you think that's more likely now a 2021 cycle event?

Yes. I think it's first half 2021 cycle event.

Okay, then finally, just on the cash use in the quarter, the $10.3 million associated with revenue accrual last quarter, did that come out of cash in Q3 or did you pay that in October?

The actual cash came out in October.

I am showing no further question at this time. I would like to turn the conference over back to Harry Stylli for any closing remarks.

Thank you all once again for participating in the call and thank you for your interest in Progenity. We'll hope that you will join us for our virtual Preeclampsia Investor R&D Day on November 20. In addition, we will be participating in the upcoming virtual Piper Healthcare Conference in early December. I look forward to reconnecting with many of you then. If you have any additional questions, please feel free to contact us. Have a good evening, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.